The Market Is Undergoing a Difficult Transition Heading Into Its Weakest Period
The Magnificent Seven names are no longer magnificent, but can the market find new leadership?
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With the Nvidia NVDA earnings report in the books, the market is now forced to recognize an unpleasant fact — the Magnificent Seven stocks are no longer magnificent. They are still solid names, but the excitement over AI has cooled, and the market is recognizing that it will take longer and cost more to realize the great power of AI in the years ahead.
It was a tough quarter for most of the Magnificent Seven, with significant negative reactions from Alphabet GOOGL, Microsoft MSFT, and others. Nvidia had a solid report, and it looks like the best value of the bunch, but there is no willingness to chase it at this point.
With the Magnificent Seven names no longer serving as market leadership, will investors rotate into new names and keep the uptrend going? There have been signs of rotation into the Russell 2000 IWM, and the DJIA is showing very good relative strength, but the transition to new leadership is difficult, and it doesn't help that we are at an important economic juncture and heading into, historically, the worst month of the year.
On Friday morning, the PCE inflation news will be released. This is the Fed's favored measure of inflation and is important, but inflation is basically a done deal at this point. The much more important issue now is economic growth and employment.
While market remains confident that the Fed has engineered a soft landing and that a recession can be avoided, a few surprise economic reports could easily upset the apple cart. The Goldilocks economic scenario is what is holding up the market right now, but it will be challenged as the Fed actually starts to cut rates in about two weeks.
I am concerned that the market is going to go through a rocky period as it transitions away from Magnificent Seven leadership, rotates into lagging names, and grapples with the potential of economic slowing. The fact that this occurs as we move into the weakest period of the year makes problems more likely.
As I've been discussing, my game plan right now is to keep cash levels elevated and be very selective with new buying. If we do see a deeper correction, there are going to be some great opportunities, and the technical setup will be very strong by the end of the year. I'm ready to change my mind if the price action improves, but for now, I'm very cautious.
At the time of publication, Rev Shark was long NVDA.
